Dollar-cost averaging

This page will provide you with more information about dollar-cost averaging, a method that can help limit the risks of market fluctuations.

If you want to find out more about the right investment options for you, contact DFS Investments.

What is dollar-cost averaging?

A risk of mutual funds is the fluctuating share price. Shares that were purchased on Monday for $9.50 may be selling for $9.35 on Tuesday or $9.58 on Thursday. These fluctuations occur because the prices of the securities in a fund will change based on activities in the markets.

Dollar-cost averaging is one way to help smooth out the effect of market fluctuation. It occurs when investors put the same amount of money into their account on a regular basis. Transferring money from a bank account to purchase mutual fund shares is a convenient way to do this.

The result of dollar-cost averaging is that more shares are purchased when the price is low and fewer shares are purchased when prices are high, which should make the average cost per share lower than the average share price. Using this method, you can decrease the risk of making a lump sum purchase at an inopportune time. Dollar-cost averaging does not, however, ensure a profit or protect against loss.

Hypothetical illustration of dollar-cost averaging

The example below shows that after investing for 12 months, the average cost per share is lower than the price of the current cost per share.

Investment Date

Amount invested ($)

Share price ($)

# of Shares purchased

January

100

10.00

10.000

February

100

9.78

10.225

March

100

10.40

9.615

April

100

9.62

10.395

May

100

10.50

9.524

June

100

10.75

9.302

July

100

9.87

10.132

August

100

10.75

9.302

September

100

11.10

9.009

October

100

11.50

8.696

November

100

11.30

8.849

December

100

11.25

8.888

Investment Date

Amount invested ($)

January

100

February

100

March

100

April

100

May

100

June

100

July

100

August

100

September

100

October

100

November

100

December

100

Investment Date

Share price ($)

January

10.00

February

9.78

March

10.40

April

9,62

May

10.50

June

10.75

July

9.87

August

10.75

September

11.10

October

11.50

November

11.30

December

11.25

Investment Date

# of Shares purchased

January

10.000

February

10.225

March

9.615

April

10.395

May

9.524

June

9.302

July

10.132

August

9.302

September

9.009

October

8.696

November

8.849

December

8.888

The chart above is intended to illustrate the mathematical principle of dollar-cost averaging. This hypothetical example is for illustrative purposes only and doesn't represent any specific type of investment. It doesn't include the impact of expenses or fees, which would have reduced the results of the illustration.

How to take advantage of dollar-cost averaging

There are many ways an investor can take advantage of dollar-cost averaging. A common method is to regularly invest a fixed amount through a pre-authorized chequing account (PAC). A predetermined amount is regularly deducted from the investor’s bank account through electronic funds transfer (EFT). The purchase may be scheduled to occur twice per month, monthly, quarterly or any way that is convenient for the investor.

Mutual Funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.

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